Courts: Former employee's lawsuit against Chairman Milan Panic gives insider's view of how firm's directors struggled to hold the boss accountable. No allegations have been proved.

ICN Pharmaceuticals Chairman Milan Panic should be basking in the hard-won victories of building one of the world's fastest-growing drug companies.

The Costa Mesa drug maker is posting record profits and is boldly expanding into Eastern Europe and Russia.

But one lingering problem mars the image of success. Barring an out-of-court settlement, Panic is set to stand trial next month in Orange County Superior Court on charges that he sexually harassed ICN's former human resources director, Mary Martinelli.

Martinelli, a $101,200-a-year executive whose duties included dealing with sexual harassment claims, is one of six female ICN employees in the past five years to accuse the 68-year-old Panic of sexual harassment, and one of four to file a lawsuit.

New documents recently filed in her case offer a rare insider's account of how directors on an all-male corporate board--two of whom have close relationships to Panic or the company beyond their directorships--responded to the rising number of sexual harassment claims against its chairman.

For the Record Los Angeles Times Thursday July 23, 1998 Home Edition Part A Page 3 Metro Desk 2 inches; 45 words Type of Material: Correction Suits against Panic--In a June 15 Times story about sexual harassment suits filed against ICN Pharmaceuticals Chairman Milan Panic, Conference Board official Carolyn Brancato's comments about the independence of corporate directors were general in nature, and not about ICN or director Stephen Moses in particular.

The case also shows how directors of a hugely successful enterprise struggled to hold the boss accountable.

Court records show that ICN directors, worried about more lawsuits, bad publicity and the effect it could have on the company's stock price, resolved to reduce or eliminate the flow of allegations. Yet they were loath to take steps against Panic, a former prime minister of Yugoslavia, that could jeopardize the company's expansion in Eastern Europe.

Testimony by a special three-member panel of board members shows that they concluded that there was no reason to take any action involving Panic beyond holding him financially responsible for settling one of the lawsuits, which was filed by Debra Levy, Panic's former secretary.

"We felt that the settlement was enough, and to engage in any other activities with respect to him might result in the company business around the world being harmed," director Alan F. Charles said in a deposition.

It is that type of bottom-line view that contributed to the growing number of harassment claims against Panic, said Alan Exelrod, Martinelli's lawyer.

"Officers of the company have known about his behavior for at least six years," Exelrod said. The company's directors "haven't acted in a responsible manner to protect the women of ICN."

Panic, who declined to be interviewed, has long maintained that he has done nothing wrong. So far, none of the harassment allegations has been proved.

The lawsuits by the four ICN employees alleged that Panic made unwanted advances, propositioned them for sex, touched them in undesired ways and indicated that their responses might affect their careers.

As for Martinelli's case, which alleges that Panic harassed her for more than six years, "our position is that the allegations are wholly lacking in merit and we'll defend it vigorously," said David C. Watt, ICN's general counsel.

As is common practice in legal matters involving a chief executive, ICN's board asked a special committee of directors to oversee its handling of the harassment case filed against Panic by Levy. She had separately sued him for paternity.

Barker's First Interstate was Panic's corporate banker until the mid-1980s, and the two have known each other more than 30 years, according to a deposition in the Martinelli case given by Barker.

Charles, who handled public relations duties at UCLA, testified that he received about $72,000 in the past couple of years as a consultant for ICN on public relations programs.

Moses said in his deposition in the case that in the early 1990s, he and Panic considered working with the Yugoslav government to build houses there.

The ventures were scuttled after ethnic hostilities in the Balkans flared anew, Moses said.

While the panel's scope was limited to the Levy case, the directors heard about other potential claims against Panic from Watt, ICN's general counsel, and Arnold Burns of the New York law firm now called Proskauer Rose LLP, which defended Panic and ICN in the Levy case.

The panel--and the board that eventually approved its recommendations--vacillated in its attempts to rein in the mounting allegations against Panic, court records show.

On one hand, the directors believed that each harassment case should be weighed separately on its own merits and noted that none of the allegations against Panic had been substantiated in court.

On the other hand, the board required Panic to personally pay a confidential settlement with Levy, despite the chairman's claims that he had done nothing wrong.

The directors decided that it would be best for the rapidly growing company to avoid a public trial and potentially bad publicity, according to court documents.